Collecting dividends is one of the major and fundamental rights granted to shareholders of capital stock companies (i.e. limited liability partnerships and joint stock corporations). From a commercial point of view collecting dividends is actually one of the significant targets for investors participating in capital stock companies. This target is even more crucial for joint stock corporations as it has a major purpose for both national and foreign investors investing through joint stock corporations.
Distribution of dividends is primarily regulated under the Turkish Commercial Code (the "TCC"). Mandatory articles of the TCC provide that dividends may only be distributed from the net profit of the company determined in the relevant year's audited balance sheet or from legal reserves which were set aside for this purpose. As provided under the TCC, the fiscal year of a company cannot be less than six months, and it may also not be more than one year. However, Tax Procedure Law limits the rule set by the TCC, and further provides that unless approval of the Ministry of Finance is obtained, the fiscal year of a joint stock corporation cannot be less than one year. In light of these provisions, the shareholder of a joint stock corporation is only entitled to collect income of dividends once every year since the fiscal year of a joint stock corporation is one calendar year in length, in principle. Since Turkey had serious inflation problems in the past, it is most probable that the value of the profit gained would decrease until it is distributed as a dividend. Another discouraging factor for investors is that profit can only be distributed once a year, so they can only receive the return of their investments once a year.
Distribution of interim dividends is regarded as a solution to the above-mentioned discouraging factors. In principle, interim dividends may be distributed several times in a year, calculated from the recorded profits in the financial statements of joint stock corporations that are issued in interim quarterly payment periods. Distribution of interim dividends in listed companies was introduced to Turkish Legislation through an amendment to the Capital Markets Law (the "CML"), on 18 December 1999. Amended Article 15 of the CML and the Communiqué of the Capital Market Board Series IV No: 27 dated 13 November 2001 ("Communiqué No. 27") regulates principles of distributing interim dividends in listed companies. According to the CML and Communiqué No. 27, in listed companies, a board of directors can resolve to distribute interim dividends from the profits shown in balance sheets that are issued in the 3rd, 6th and 9th months of a fiscal year.
Despite the fact that closed joint stock corporations may only distribute dividends once in a fiscal year, the Ministry of Finance enacted Communiqué No. 26482, dated 3 April 2007, regulating the application of the Corporate Tax Law (the "CTL Communiqué") enabling closed joint stock corporations to distribute interim dividends. The CTL Communiqué mainly regulates the procedure and taxation of distributing dividends, including interim dividends. According to the CTL Communiqué, tax payers who are subject to the Corporate Tax Law are entitled to distribute interim dividends from the profit shown in their financial statements that are prepared within temporary taxable periods. According to Article 15.6.6 of the CTL Communiqué, the maximum aggregate amount of an interim dividend which may be distributed cannot exceed half of the annual profit of the previous year, after losses, taxes and legal reserves of the previous year are deducted; or the amount of the extraordinary reserves appearing on the approved balance sheet of the previous year. Although it may seem that the new rules provisioned under the CTL Communiqué enables closed companies to distribute interim dividends, if a closer look is taken at the provisions regarding interim dividend distributions, since it does not sufficiently set out all of the aspects of the interim dividend distribution and contains provisions contradicting the TCC, it will be difficult to implement the above-mentioned provision in practice.
The interim dividend distribution provided for under the CTL Communiqué contradicts several mandatory provisions of the TCC. Firstly, under the TCC, the general assembly of a joint stock corporation is the authorized body which resolves to distribute dividends, and it cannot delegate such authority to other organs of the joint stock corporation (i.e. board of directors). However, under the CTL Communiqué, the general assembly is authorized to assign the board of directors to resolve to distribute interim dividends. Another contradiction is that by virtue of mandatory Articles 369 and 470 of the TCC, dividends may only be distributed from the net profit stated in the relevant year's balance sheet or from the voluntary reserves. However, according to the CTL Communiqué, closed joint stock corporations are entitled to distribute interim dividends from the profit stated in the charts that are prepared within temporary taxable periods. At this point, the question as to whether or not the mandatory articles of a main code (i.e. the TCC) may be altered by a communiqué (i.e. the CTL Communiqué) may be asked. Since the principle of hierarchy of norms forbids such alteration, it is highly likely that unless the provisions of the TCC are amended in line with the provisions of the CTL Communiqué, the provisions of the CTL Communiqué regarding the distribution of interim dividends cannot be applied.
Another legal controversy on this issue is that the procedure of distributing interim dividends is not clearly set out and is therefore limited. According to the CTL Communiqué, in order for a closed joint stock corporation to be entitled to distribute interim dividends, the articles of association of a company must allow distribution and also must include a provision stating that the distributed interim dividends may be recalled. The recall mechanism may also cause some problems for the shareholders, and its application is also disputed.
Even though the distribution of interim dividends in closed companies is regulated by the CTL Communiqué, the issue of whether a closed joint stock corporation may distribute interim dividends is still in dispute. Scholarly opinion questions whether or not a new procedure of distributing interim dividends can be regulated under the CTL Communiqué when such procedure is not mentioned either in the Corporate Tax Law or in the TCC. The CTL Communiqué is enacted as a part of tax legislation. In principle, tax law legislation should only deal with dividends in terms of its taxation. The procedure of distributing interim dividends is an issue to be governed under commercial law. Hence, a regulation of distributing interim dividends should be regulated under the TCC.
The draft TCC (the "Draft") is currently being negotiated before the Grand National Assembly of Turkey. It is likely that the Draft will be enacted in 2008. The Draft stipulates distribution of interim dividends. According to Article 509 of the Draft, the distribution of interim dividends will be subject to a communiqué that the Ministry of Industry and Trade will issue.
In light of the foregoing, as the scholars suggest, closed joint stock corporations may not distribute interim dividends under the current legislation. If an attempt is made to distribute interim dividends, the joint stock corporations will face legal and practical difficulties. Therefore, we conclude that the procedure provided under the CTL Communiqué is misleading, rather than being a solution to the disadvantages of the current legislation regarding the distribution of interim dividends.
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